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Bigger isn't always better: the case for limited menus

Limited menus for QSRs and fast casual restaurants have financial and operational benefits.

January 28, 2015 by Darrel Suderman — President, Food Technical Consulting

Last month I argued that service time is not as important to QSR and Fast Casual customers as food quality and order accuracy. I also argued that investors and private equity groups are quick to criticize McDonald’s for falling short on restaurant metrics they poorly understand - particularly operational metrics. I stated that investor organizations read P & L statements very well, but rarely correlate operations metrics with various financial sensitivity analyses. Today, I want to layout the financial and operational arguments for limited QSR and fast casual menus.

Cluttered Menu Boards

A segment of restaurant chains have cluttered menu boards representing enormous menu items such as Jack-in-the-Box, McDonald’s, Taco Bell, and Chick-fil-A. Yet these brands, as well as limited menu brands, generally use the same labor costing performance metrics and cost calculations. For example, they may report labor cost successful if their labor costs range between 15 – 20 percent. But I argue that labor costs are inherently different for limited menus vs expanded menus – and new metrics need to be applied. Labor efficiency should be significantly better for chains like SmashBurger and Shake Shack than Jack-in-the-Box and McDonald’s.

Reason: Activity-based Costing (ABC) and Activity-based Management (ABM)

Activity-based Costing and Activity-based Management have been used for quite a few years in nonfood manufacturing industries, but rarely seen in food manufacturing companies. And now, service companies are beginning to apply activity-based costing to their organizations – like restaurant chains. ABC measures cost and performance of activities, resources, and objects which consume them. This costing technique would demonstrate that the labor cost per burger is less in a high volume limited menu restaurant than in a restaurant with 50 menu items. ABC costing would also assign a higher labor cost burden to slow sales menu item movers. If properly practiced, elevated labor costs of slow moving menu items should be the dagger that kills those menu items. However, most of us who have worked in restaurants understand that it takes an act of God to remove menu items.

What are the Outputs of an ABC/ABM Cost Management Program?

Restaurant chains and food manufacturing companies who implement ABC/ABM can expect the following information to improve store profitability:

1. The cost of activities and business processes to execute the menu

2. The cost of non-value-added activities

3. Activity-based performance measures

4. Accurate product/service costs

5. And cost drivers

Cost-plus Contract Benefits

Another hidden profit benefit to restaurant chains for activity-based costing is accurate validation of numbers used in cost-plus contracts. Most purchasing managers believe cost-plus product costing represents the most accurate valuation of purchased items, but that is simply not true. I have compared up to 6 cost-plus contracts side-by-side for the same product with cost variances of 10 percent. The simple application of ABC costing methodologies to product cost calculations and significantly increase company profitability significantly.

Summary

In summary, activity-based costing is data-based, accurate, and represents a proven methodology for assigning true food costs for both new product launches and existing products.

About Darrel Suderman

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